Hoping That Santa Brings The Right-Sized Interest Rate Cut
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It kind of reminds you of waiting for Santa Claus. Will he come? I've been good!! Will he bring me that cut in interest rates I've been wishing for? I hope he brings me the right size.
We will find out on Tuesday when Santa, aka Federal Reserve Chairman Ben Bernanke, and his elves of the open market committee have their meeting. The majority of those who should know think there will be a cut, however the size of the cut and what the accompanying statement will say is likely to be difficult for the Fed.
The difficulty comes from increasing evidence the economy is slowing and yet the Fed does not want to stoke inflation with a cut that reaches too deep, too fast. Financial institutions continue to mount losses related to mortgage instruments as foreclosures continue at a rapid pace and investors are reluctant to buy any mortgage related securities. Even banks are reluctant to lend to each other. The London interbank offered rate (Libor) charged on short-term dollar loans has shot up, especially for loans extending beyond year end.
The market slowed down on Friday, both in anticipation of the Fed's move and to take a breather after rallies on Wednesday and Thursday. For the week the Dow Jones Industrial Average was up 1.9% and has risen 5% over the past two weeks and is now ahead 9.3% so far this year, but it is still 539 points below its record close on Oct.9. A rally back to that record will depend upon many things, not the least of which is the overall reaction to a relief plan for borrowers.
The Bush Administration's plan to give subprime borrowers a break on their mortgages is already catching flak from various sources, including other homeowners. Treasury Secretary Henry Paulson is pursuing an agreement with lenders and investor groups to freeze rates on subprime adjustable-rate mortgages at their original levels. The proposal is aimed at helping homeowners who might fall behind on their payments when the higher rates kick in, and thereby cause a flood of foreclosures next year when a raft of mortgages are scheduled to reset.
Some homeowners are complaining that the plan isn't fair to borrowers who didn't overextend themselves. Others argue that the government shouldn't be involved in perpetuating a housing bubble that needs to deflate. Some say the plan is just postponing the inevitable. Perhaps the more far-reaching question is - should the government be involved at all?
To be sure, the proper functioning of government is to exercise good monetary policy and fiscal control. This is done primarily through the Federal Reserve System. And to the extent that the subprime mortgage debacle could morph into a general credit crunch and throw the economy into a recession, the government has a role to play. But should that role include bailing out borrowers and lenders that exercised poor judgment in committing to loans that can't be met? One has to ask then, in what other frailties of man's business conduct should the government be involved?
That is not to say that fraud and usury should be tolerated. Both are unconscionable acts and those that have practiced them should be dealt with harshly. Maybe this whole subprime mess will result in the exercise of better judgment by both the borrower and lender.
So as you wait for the interest rate Santa, remember to keep your risk within your tolerance and keep ahead of inflation.
I invite your questions.
Or Contact Jerry Cole at:
509 Center Ave, Suite #102, Bay City, MI
(989) 892-5055
(The opinions expressed are solely those of the author and not Gen worth Financial Securities Corporation.)509 Center Ave, Suite #102, Bay City, MI
(989) 892-5055
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Jerry Cole - Retirement, Investment |
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